The new Qualifying Asset Holding Company regime
Draft legislation has been published setting out a new elective regime for the taxation of certain qualifying asset holding companies from April 2022. The new Qualifying Asset Holding Company (QAHC) regime is part of a wider review looking at enhancing the UK’s competitiveness in the funds sector and is intended to make the UK a more attractive location for asset holding.
The overarching aim of the new regime is to tax investors, broadly, as if they invested in the underlying assets and that UK resident intermediate holding companies don’t pay more tax than is proportionate in light of the activities they perform. It is not intended to apply to trading activities, UK property or intangible assets.
The new regime offers a number of preferential tax treatments to holding companies which meet the QAHC criteria in relation to its qualifying investment activity.
The key benefits of being a QHAC are:
- Gains on disposals of shares (other than shares in UK property rich companies) or overseas land will be exempt.
- Income profits of an overseas property business of a QAHC will be exempt where those profits are subject to tax in an overseas jurisdiction.
- Withholding tax on payments of interest to investors in the QAHC will be dis-applied.
- Deductions will be allowed for interest paid by the QHAC under profit participating loans and results-dependent debt that would usually be disallowed as distributions (subject to usual transfer pricing rules).
- Rules which prevent interest deductions being claimed on an accruals basis will be switched off.
- Premiums paid on a buy-back of shares will be treated as capital in the hands of an individual shareholder rather than as an income distribution (subject to anti-avoidance rules to prevent share buy-backs being used to convert income into capital).
- Buy-backs of share and loan capital will be exempt from stamp duty and stamp duty reserve tax (SDRT).
In order to qualify as a QAHC, the holding company must:
- Be at least 70% owned by diversely owned funds managed by regulated managers or certain institutional investors (sovereign wealth funds, pension funds etc.).
- Exist to facilitate the flow of capital, income and gains between investors and underlying investments.
At first glance this is a complex regime both in terms of entry criteria and application of the preferential tax treatment to the QAHC. The Government decided against making general changes to the tax system or adapting existing regimes (such as that which exists for securitisation companies) in favour of a bespoke regime for QAHCs. However, if those can be overcome it does address a number of issues with using a UK asset holding company. There are a few outstanding areas of detail which remain to be finalised, hopefully without the addition of significant complexity.
At the same time as the introduction of QAHC’s the REIT regime is being amended to address a number of features that had made it unattractive: it may be that for some funds in the real estate sector, and particularly in light of the exclusion from the key benefits for UK real estate income and gains and gains on UK property rich companies, the attractions of the established REIT regime outweigh the complexity inherent in accessing the benefits of the new QAHC.
Real Estate welcome changes to the UK REIT regime
During the course of the recent UK asset holding company regime consultation, a number of points were raised with HM Revenue & Customs in respect of ways in which the UK REIT regime could be amended to make it more attractive. The UK REIT regime is designed to enable rental income and gains to accrue to investors without additional layers of tax: tax is levied at the level of investors, effectively replicating the tax implications of investors holding property directly, rather than at the level of the REIT vehicle. A key benefit of a UK REIT is that it is UK-based, and is internationally recognised.
Draft legislation for the Finance Bill 2022 has also been published to ensure that the UK REIT regime is competitive.
The key changes proposed are:
- Removal of Listing Requirement for UK REITS owned by institutional investors
UK REITS currently need to be listed or traded on a recognised stock exchange. This requirement is, in practice, frequently met by a listing on the International Stock Exchange (TISE), which does not have a trading requirement.
It has been announced that with effect from 1 April 2022, UK REITs will no longer need to satisfy the listing requirement where more than 99% of the shares are held by “institutional investors” (which includes sovereign wealth funds, UK and overseas pension funds and life companies, limited partnership collective investment schemes and UK REITS, UK authorised unit trust schemes and OEICS) (and, in each case foreign equivalents).
- Penalty charge for holders of excessive rights: disapplication to shareholders otherwise entitled to receive property income distributions without deduction
Provisions in the REIT regime introduced to prevent the reduction of UK tax on rental profits through treaty relief introduce complexity where shareholders have 10% or more (holders of excessive rights). As most treaties provide for reductions in withholding tax on dividends where the shareholder holds 10% or more, the tax charge on REITs making distributions to corporate shareholders with “excessive rights” (namely ones whose shareholding is 10% or more) effectively prevents treaty relief on withholding tax reducing the UK’s right to tax rental profits. This often means investors have to consider fragmenting their holding so that it is held by a number of separate subsidiaries, none of which holds 10% which in turn creates an unnecessarily complex holding structure for the investor.
With effect from 1 April 2022, the “holders of excessive rights” provisions will no longer apply to shareholders who would otherwise be entitled to receive payments of property income distributions gross (such as UK corporation tax payers). For investors who are not entitled to gross distributions the requirements will remain.
Changes are also being made to two aspects of the “balance of business” test to: (i) disregard non-rental profits arising because a REIT has to comply with certain planning obligations; and (ii) introduce a simplified test so that, if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not need to prepare the additional statements which would be required to meet the full test.
All of these changes are very welcome and increase the attractiveness of the UK REIT Regime.